2. Process Cost Accounting
Chapter 30
Process Cost Accounting
Section 1: Process Cost
Accounting System
Section Objectives
In Chapter 30, section 1 we will compute equivalent units of production under a process cost accounting system. In addition, we will prepare a cost of production report and compute the unit cost of manufacturing. Finally, we will record costs incurred and the flow of costs as products move through the manufacturing process.
Compute equivalent units of production with no beginning work in process inventory.
Prepare a cost of production report with no beginning work in process inventory.
Compute the unit cost of manufacturing under the process cost accounting system.
Record costs incurred and the flow of costs as products move through the manufacturing process and are sold.

3. Process Cost Accounting System
This system is used in operations when a single product is manufactured and production is continuous.
Companies like oil refineries, cement producers, and paint manufacturers use this system.
Costs are accumulated for each process or department and then transferred to the next department.
A process cost accounting system is used when a single product is manufactured and production is continuous. Cost are accumulated from each process or department and then transferred to the next department. Companies like oil refineries, cement producers, and paint manufacturers would use a process cost accounting system.

4. How is a process cost system different from a job order cost system?
Under a process cost system:
Job order cost sheets are not maintained.
Separate work in process accounts are maintained for each department.
Costs are identified with specific departments as incurred.
A process cost accounting system is different from a job order cost system in several areas. First, job order cost sheets are not maintained. Separate work-in-process accounts are maintained for each department, and costs are identified with specific departments as incurred.

5. Flow of Goods in a Factory Operation
Knox Manufacturing Company (manufacturer of trays)
Assembly Department
Finished Goods Inventory
Finishing Department
In the example, Knox Manufacturing Company has two departments. The Assembly department and the Finishing department. All products begin in the Assembly Department, however, some products are sold in an unpainted state so they are transferred directly to finished goods. Products that need to be painted are transferred to the Finishing Department.
All products begin in the Assembly Department.
Trays to be sold in an unpainted state are transferred to the finished goods storeroom.
Trays to be painted are transferred to the Finishing Department.

6. Departmental Cost Data All costs are recorded by department
Assembly Finishing
Department Department
All costs are recorded by department
In this example, all material, labor and overhead costs are recorded by department.

7. Objective 1.
Compute Equivalent Units Of Production With No Beginning Work In Process Inventory.
Our first objective is to compute equivalent units of production with no beginning work in process inventory.

8. What is equivalent production in a process cost system?
QUESTION:
What is equivalent production in a process
cost system?
Equivalent production is the estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the month.
ANSWER:
Equivalent units of production is the estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the month.

9. Calculating Equivalent Units
Assembly
Department
Notice how separate equivalent unit computations are made for materials and for labor and overhead. In this example, equivalent units of production for materials was 6,000 units, while equivalent units of production for labor and overhead was 5,900.
Separate equivalent unit computations are made for materials and for labor and overhead.
In computing equivalent production, accountants frequently consider labor and overhead to be at the same stage of production.

10. Objective 2.
Prepare A Cost Of Production Report With No Beginning Work In Process Inventory.
Our second object is to prepare a cost of production report with no beginning work-in-process inventory.

11. Cost of Production Report
Summarizes all costs charged to each department.
Shows costs assigned to:
Goods transferred out of the department
Goods still in process
Has separate sections for:
Quantities
Costs
Reconciles the total to be accounted for with the total accounted for.
A cost of production report summarizes all costs charged to each department. It also shows costs assigned to goods transferred out of the department and goods still in process. Finally, the production report has separate sections for quantities and costs, and reconciles the total to be accounted for with the total accounted for.

12. Objective 3.
Compute The Unit Cost Of Manufacturing Under The Process Cost Accounting System.
Our third objective is to compute the unit cost of manufacturing under the process cost accounting system.

13. Cost of Production Report by Department
Cost Schedule
Quantity Schedule
Shows units to be accounted for and what happened to those units.
The cost of production report has a quantity schedule which shows the number of units to be accounted for and what happened to those units. The report also has a cost schedule which shows the total and unit cost of each element, and the cumulative cost total.
Shows total and unit cost of each element and cumulative cost total.
Shows cost of units transferred out.

14. Cost Schedule: Unit Cost
Total Cost
E.P. Units
Unit cost
Costs to be accounted for:
Costs in current Department
Materials
$18,000
6,000
$3.00
Labor
$25,000
5,900
$4.24
Manufacturing O.H.
$12,300
$2.08
Cumulative Total Cost
$55,300
$9.32
In this example, the materials cost per unit is calculated by taking the total materials cost of $18,000 and dividing that amount by the 6,000 equivalent units of production. The cost per equivalent unit for materials is $3.
Materials cost per unit = $18,000 / 6,000 units =
$3.00/per unit

15. Objective 4.
Record Costs Incurred And The Flow Of Costs As Products Move Through The Manufacturing Process And Are Sold.
Our fourth objective is to record costs incurred and the flow of costs as products move through the manufacturing process and are sold.

16. Charging Direct Materials Costs to Work in Process
20--
Apr Work in Process—Assembly Department ,000.00
Work in Process—Finishing Department ,000.00
Raw Materials Inventory , Allocation of materials
to production;
In this example, direct materials costs are charged to the work-in-process assembly department, and the work-in-process finishing department. The costs are kept separate for each department.

17. Charging Direct Labor to Work in Process
20--
Apr Work in Process—Assembly Department ,000.00
Work in Process—Finishing Department ,000.00
Social Security Tax Payable ,542.00
Medicare Tax Payable
Employee Income Tax Payable ,150.00
Salaries and Wages Payable ,713.50
Salaries and wages for April.
In this example, direct labor costs are added to the work-in-process assembly department and the work-in-process finishing department.

18. Manufacturing Overhead Costs in the Process Cost Accounting System
When incurred, overhead costs are debited to the Manufacturing Overhead account.
At month-end, overhead costs are allocated to the producing departments:
Debit Work-in-Process—Assembly Department
Debit Work-in-Process—Finishing Department
Credit Manufacturing Overhead
When actual overhead costs are incurred during an accounting period, we debit the manufacturing overhead account. At the end of the month, overhead costs are allocated to the producing departments by debiting the work-in-process accounts and crediting the manufacturing overhead account.

19. Recording Transfers of Products out of Departments
Assembly Department
$46,600
Finishing Department
$67,830
$4,660
Finished Goods Inventory
Assembly Department
20--
Apr Work in Process—Finishing Department ,600.00
Finished Goods Inventory ,660.00
Work in Process —Assembly Department , Cost of goods transferred
out of laminating department in April
In this example, we transferred $46,600 of costs from the Assembly department to the finishing department and $4,660 of Assembly department costs to finished goods inventory. We also transferred $67,830 of costs from the Finishing department to finished goods inventory.
Finishing Department
30 Finished Goods Inventory ,830.00
Work in Process—Finishing Department ,830.00
Cost of goods completed in April

20. Recording Sale of Finished Goods
The final step is to record the sale of finished goods.
20--
Apr 30
Accounts Receivable ,000.00
Record sales on credit for April
Cost of Goods Sold ,000.00
Finished Goods ,000.00
Sales ,000.00
Cost of goods sold in April 30
Record sales.
2. Record cost of goods sold.
When recording the sale of finished goods two entries are made. First, we record the sale by debiting accounts receivable and crediting sales. Second, we debit cost of goods sold and credit finished goods inventory to record the cost of the product sold.
**In a perpetual inventory system, two journal entries are required to record a sale.

21. Complete the following sentences: Equivalent production
SECTION
Complete the following sentences:
process cost
The ___________ accounting system is used in operations when a single product is manufactured and production is continuous.
Equivalent production
___________________ is the estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the month.
Lets review;
When computing equivalent production, accountants frequently consider _____ and ________ to be at the same stage of production.
labor
overhead

22. R E V I W cost of production report
SECTION R E V I W
Complete the following sentences:
The ______________________ summarizes all costs charged to each department.
cost of production report
The cost of production report shows the costs assigned to the goods transferred ___________________ and to the goods in _______.
out of the department
process
Recording the cost of goods sold requires a debit to _________________ and a credit to ______________________.
Cost of Goods Sold
Finished Goods Inventory

23. College Accounting, 11th Edition
Thank You
for using
College Accounting, 11th Edition
Price • Haddock • Brock